Markel Group - 10-Q quarterly report FY

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

or

Commission File Number: 001-15811

MARKEL CORPORATION

(Exact name of registrant as specified in its charter)

4521 Highwoods Parkway, Glen Allen, Virginia 23060-6148

(Address of principal executive offices)

(Zip Code)

(804) 747-0136

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Number of shares of the registrant’s common stock outstanding at October 29, 2007: 9,956,743

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Markel Corporation

Form 10-Q

Index

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PART I. FINANCIAL INFORMATION

MARKEL CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

See accompanying notes to consolidated financial statements.

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MARKEL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income and Comprehensive Income

See accompanying notes to consolidated financial statements.

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MARKEL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity

See accompanying notes to consolidated financial statements.

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MARKEL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

See accompanying notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Principles of Consolidation

Markel Corporation (the Company) markets and underwrites specialty insurance products and programs to a variety of niche markets.

The consolidated balance sheet as of September 30, 2007, the related consolidated statements of income and comprehensive income for the quarters and nine months ended September 30, 2007 and 2006, the consolidated statements of changes in shareholders’ equity and the consolidated statements of cash flows for the nine months ended September 30, 2007 and 2006 are unaudited. In the opinion of management, all adjustments necessary for fair presentation of such consolidated financial statements have been included. Such adjustments consist only of normal, recurring items. Interim results are not necessarily indicative of results of operations for the entire year. The consolidated balance sheet as of December 31, 2006 was derived from the Company’s audited annual consolidated financial statements.

The preparation of financial statements in accordance with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results may differ from the estimates and assumptions used in preparing the consolidated financial statements.

The consolidated financial statements and notes are presented as permitted by Form 10-Q and do not contain certain information included in the Company’s annual consolidated financial statements and notes. Readers are urged to review the Company’s 2006 Annual Report on Form 10-K for a more complete description of the Company’s business and accounting policies.

Certain prior year amounts have been reclassified to conform to the current presentation.

2. Net Income per Share

Net income per share was determined by dividing net income by the applicable weighted average shares outstanding.

Prior to the conversion of the Company’s convertible notes payable in December 2006, diluted net income per

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share reflected the application of the if-converted method as defined in Statement of Financial Accounting Standards (Statement) No. 128, Earnings Per Share.

3. Reinsurance

The following table summarizes the effect of reinsurance on premiums written and earned.

Incurred losses and loss adjustment expenses were net of reinsurance recoverables (ceded incurred losses and loss adjustment expenses) of $16.4 million and $6.9 million, respectively, for the quarters ended September 30, 2007 and 2006 and $78.8 million and $56.1 million, respectively, for the nine months ended September 30, 2007 and 2006.

4. Junior Subordinated Deferrable Interest Debentures (8.71% Junior Subordinated Debentures)

The Company redeemed $106.4 million principal amount of its 8.71% Junior Subordinated Debentures for $111.0 million on January 2, 2007. This redemption resulted in a loss of $4.6 million, which is reflected in net realized investment gains.

5. Income Taxes

In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 provides recognition criteria and a related measurement model for uncertain tax positions taken or expected to be taken in income tax returns. FIN 48 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities. Tax positions that meet the more likely than not threshold are then measured using a probability weighted approach recognizing the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. The Company adopted the provisions of FIN 48 on January 1, 2007. In general, the Company is not subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years prior to 2003 and, accordingly, a liability for uncertain tax positions was not required for those years.

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As a result of adopting FIN 48, retained earnings increased $20.1 million; goodwill decreased $9.4 million, primarily related to the Company’s acquisition of Markel International; and common stock increased $2.8 million related to closed stock option plans and other capital transactions. In addition, the valuation allowance established upon the acquisition of Markel International and a corresponding deferred tax asset were both decreased by $37.5 million.

At the time it adopted FIN 48, the Company had unrecognized tax benefits of $45.8 million. If recognized, $6.8 million of these tax benefits would decrease the annual effective tax rate, $37.5 million would decrease goodwill and $1.5 million would decrease deferred tax assets in the year those benefits are realized. There were no significant changes in unrecognized tax benefits during the nine months ended September 30, 2007, and the Company does not currently anticipate any significant changes in unrecognized tax benefits during 2007.

The Company classifies all interest and penalties associated with uncertain tax positions as income tax expense. Upon adoption of FIN 48, the Company recorded a liability of $3.3 million related to interest and penalties in other liabilities.

The IRS is currently examining the Company’s 2005 federal income tax return. The Company believes its income tax liabilities were adequate as of September 30, 2007; however, these liabilities could be adjusted as a result of this examination.

6. Other Comprehensive Income (Loss)

Other comprehensive income (loss) includes net holding gains (losses) on investments arising during the period less reclassification adjustments for net gains included in net income. Other comprehensive income (loss) also includes foreign currency translation adjustments and, in 2007, the amortization of net actuarial pension loss. The related tax expense (benefit) on net holding gains (losses) on investments arising during the period was $9.7 million and $(7.8) million, respectively, for the quarter and nine months ended September 30, 2007 and $72.3 million and $37.2 million, respectively, for the same periods in 2006. The related tax expense on the reclassification adjustments for net gains included in net income was $1.1 million and $24.3 million, respectively, for the quarter and nine months ended September 30, 2007 and $0.8 million and $14.6 million, respectively, for the same periods in 2006. The related tax expense on foreign currency translation adjustments was $1.5 million and $2.4 million, respectively, for the quarter and nine months ended September 30, 2007 and less than $0.1 million and $0.4 million, respectively, for the same periods in 2006. The related tax expense on the amortization of net actuarial pension loss was $0.2 million and $0.5 million, respectively, for the quarter and nine months ended September 30, 2007.

7. Contingencies

The Company’s estimates of losses from the 2005 Hurricanes assume that flood exclusions in its property policies will generally apply to flood damage in the New Orleans area following Hurricane Katrina. Beginning in late November 2006, Louisiana state and federal trial courts ruled in a number of cases (most of which the Company was not a party to) that flood damage following the New Orleans area levee breaches may not be excluded from coverage under policies similar to those the Company has written. The initial federal court ruling was appealed to the United States Court of Appeals for the Fifth Circuit, and that court overturned the trial court ruling, holding that flood exclusions in the policies under consideration unambiguously excluded coverage. While this ruling is favorable to the Company’s position and is binding on federal trial courts in the Fifth Circuit

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(Louisiana, Mississippi and Texas) where much of the Katrina-related litigation is taking place, there is also pending litigation in state courts, which are not bound by the Fifth Circuit’s ruling. If there are adverse rulings by Louisiana state appellate courts holding that flood damage is covered under the Company’s policies, losses associated with Hurricane Katrina will increase. Given the significant uncertainties involved, the Company cannot quantify the potential adverse impact of any such rulings at this time, but it could be material.

Other contingencies arise in the normal conduct of the Company’s operations and are not expected to have a material impact on the Company’s financial condition or results of operations. However, adverse outcomes are possible and could negatively impact the Company’s financial condition and results of operations.

8. Segment Reporting Disclosures

The Company operates in three segments of the specialty insurance marketplace: the Excess and Surplus Lines, the Specialty Admitted and the London markets.

All investing activities are included in the Investing segment. For purposes of segment reporting, the Other segment includes lines of business that have been discontinued in conjunction with an acquisition.

The Company considers many factors, including the nature of the underwriting units’ insurance products, production sources, distribution strategies and regulatory environment in determining how to aggregate operating segments.

Segment profit or loss for each of the Company’s operating segments is measured by underwriting profit or loss. The property and casualty insurance industry commonly defines underwriting profit or loss as earned premiums net of losses and loss adjustment expenses and underwriting, acquisition and insurance expenses. Underwriting profit or loss does not replace operating income or net income computed in accordance with U.S. GAAP as a measure of profitability. Underwriting profit or loss provides a basis for management to evaluate the Company’s underwriting performance. Segment profit for the Investing segment is measured by net investment income and net realized investment gains or losses.

The Company does not allocate assets to the Excess and Surplus Lines, Specialty Admitted and London Insurance Market operating segments for management reporting purposes. Total invested assets and the related net investment income are allocated to the Investing segment since these assets are available for payment of losses and expenses for all operating segments. The Company does not allocate capital expenditures for long-lived assets to any of its operating segments for management reporting purposes.

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a) The following tables summarize the Company’s segment disclosures.

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b) The following table reconciles segment assets to the Company’s consolidated balance sheets.

9. Acquisitions

On April 2, 2007, the Company acquired a wholesale insurance broker that markets and underwrites social services insurance programs for a combination of cash and common stock. In connection with this acquisition, the Company recognized goodwill of $1.9 million and intangible assets of $8.8 million. The intangible assets are amortized on a straight-line basis over their estimated useful lives, which range from three years to four years. Results attributable to this acquisition are included in the Specialty Admitted segment.

On June 15, 2007, the Company acquired a managing general agent that markets and underwrites errors and omissions insurance products. In connection with this acquisition, the Company recognized intangible assets of $6.0 million, which are amortized on a straight-line basis over their estimated useful lives of 4.5 years. Results attributable to this acquisition are included in the Excess and Surplus Lines segment.

Amortization of intangible assets was $0.6 million and $1.2 million, respectively, for the quarter and nine months ended September 30, 2007.

10. Employee Benefit Plans

a) Expenses relating to all of the Company’s defined contribution plans were $2.7 million and $8.5 million, respectively, for the quarter and nine months ended September 30, 2007 and $2.5 million and $7.7 million, respectively, for the same periods in 2006.

b) The following table presents the components of net periodic benefit cost for the Terra Nova Pension Plan, a defined benefit plan.

The Company contributed $2.7 million to the Terra Nova Pension Plan during the nine months ended September 30, 2007. The Company expects plan contributions to total $3.0 million in 2007.

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11. Recent Accounting Pronouncements

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. Statement No. 159 permits entities to choose to measure specified financial instruments and certain other eligible items at fair value, with changes in fair value recognized in earnings. Statement No. 159 becomes effective for the Company in the first quarter of 2008. The Company is currently evaluating Statement No. 159 to determine the potential impact that adopting this standard will have on its consolidated financial statements.

The Company adopted the recognition and disclosure provisions of Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, as of December 31, 2006. Upon the adoption of Statement No. 158, the Company recorded a net actuarial pension loss, net of taxes, of $25.0 million as a component of other comprehensive income for the year ended December 31, 2006. The Company has since determined that the net actuarial pension loss recognized upon adoption should have been presented as a direct change to accumulated other comprehensive income at December 31, 2006 and not as a component of other comprehensive income for the year ended December 31, 2006. The Company plans to modify the presentation in its 2007 Annual Report on Form 10-K.

The accompanying consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and include the accounts of Markel Corporation and all subsidiaries.

Critical Accounting Estimates

Critical accounting estimates are those estimates that both are important to the portrayal of our financial condition and results of operations and require us to exercise significant judgment. The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of material contingent assets and liabilities, including litigation contingencies. These estimates, by necessity, are based on assumptions about numerous factors.

We review our critical accounting estimates and assumptions quarterly. These reviews include evaluating the adequacy of reserves for unpaid losses and loss adjustment expenses and the reinsurance allowance for doubtful accounts, analyzing the recoverability of deferred tax assets, assessing goodwill and intangible assets for impairment and evaluating the investment portfolio for other-than-temporary declines in estimated fair value. Actual results may differ materially from the estimates and assumptions used in preparing the consolidated financial statements.

Readers are urged to review our 2006 Annual Report on Form 10-K for a more complete description of our critical accounting estimates.

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Our Business

We market and underwrite specialty insurance products and programs to a variety of niche markets and believe that our specialty product focus and niche market strategy enable us to develop expertise and specialized market knowledge. We seek to differentiate ourselves from competitors by our expertise, service, continuity and other value-based considerations. We compete in three segments of the specialty insurance marketplace: the Excess and Surplus Lines, the Specialty Admitted and the London markets. Our financial goals are to earn consistent underwriting profits and superior investment returns to build shareholder value.

Our Excess and Surplus Lines segment is comprised of five underwriting units, our Specialty Admitted segment consists of three underwriting units and our London Insurance Market segment is comprised of the ongoing operations of Markel International.

Our Excess and Surplus Lines segment writes property and casualty insurance outside of the standard market for hard-to-place risks including catastrophe-exposed property, professional liability, products liability, general liability, commercial umbrella and other coverages tailored for unique exposures.

Our Specialty Admitted segment writes risks that, although unique and hard-to-place in the standard market, must remain with an admitted insurance company for marketing and regulatory reasons. Our underwriting units in this segment write specialty program insurance for well-defined niche markets and personal and commercial property and liability coverages.

We participate in the London Market through Markel International, which includes Markel Capital Limited and Markel International Insurance Company Limited, wholly-owned subsidiaries. Markel Capital Limited is the corporate capital provider for Markel Syndicate 3000 at Lloyd’s, which is managed by Markel Syndicate Management Limited, a wholly-owned subsidiary. Our London Insurance Market segment writes specialty property, casualty, professional liability and marine insurance and reinsurance.

For purposes of segment reporting, the Other segment includes lines of business that have been discontinued in conjunction with an acquisition.

Key Performance Indicators

We measure financial success by our ability to compound growth in book value per share at a high rate of return over a long period of time. We recognize that it is difficult to grow book value consistently each year, so we measure ourselves over a five-year period. We believe that growth in book value per share is the most comprehensive measure of our success because it includes all underwriting and investing results. We measure underwriting results by our underwriting profit or loss and combined ratio. These measures are discussed in greater detail under “Results of Operations.”

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Results of Operations

The following table compares the components of net income.

Net income for the quarter ended September 30, 2007 decreased 11% compared to the same period of 2006. Net income for the nine months ended September 30, 2007 increased 15% compared to the same period of 2006. The decrease in net income for the quarter ended September 30, 2007 was primarily due to lower underwriting profits, partially offset by higher net investment income as compared to the same period of 2006. The increase in net income for the nine months ended September 30, 2007 was primarily due to improved underwriting and investing results, partially offset by higher income tax expense as compared to the same period of 2006. The components of net income are discussed in further detail under “Underwriting Results,” “Investing Results” and “Other Expenses.”

Underwriting Results

Underwriting profits are a key component of our strategy to grow book value per share. We believe that the ability to achieve consistent underwriting profits demonstrates knowledge and expertise, commitment to superior customer service and the ability to manage insurance risk. The property and casualty insurance industry commonly defines underwriting profit or loss as earned premiums net of losses and loss adjustment expenses and underwriting, acquisition and insurance expenses. We use underwriting profit or loss as a basis for evaluating our underwriting performance.

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The following table compares selected data from our underwriting operations.

Our combined ratio was 87% and 88%, respectively, for the quarter and nine months ended September 30, 2007 compared to 84% and 88%, respectively, for the same periods in 2006. The combined ratio for the third quarter of 2007 increased primarily due to lower underwriting profits within the Excess and Surplus Lines segment as compared to the third quarter of 2006. For the nine months ended September 30, 2007, lower underwriting profits within the Excess and Surplus Lines segment were offset by lower underwriting losses related to Hurricanes Katrina, Rita and Wilma (2005 Hurricanes) as compared to the same period of 2006. The combined ratio for the nine months ended September 30, 2006 included $53.3 million, or 3 points, of underwriting losses on the 2005 Hurricanes.

The combined ratio for the Excess and Surplus Lines segment was 79% and 81%, respectively, for the quarter and nine months ended September 30, 2007 compared to 71% and 77%, respectively, for the same periods in 2006. For both periods of 2007, the increase in the combined ratio was primarily due to a higher current accident year loss ratio than in 2006. The higher current accident year loss ratio in both periods of 2007 was attributable to softening insurance market conditions, which have resulted in price deterioration across many of our product lines, and to higher incurred losses at the Markel Re unit as compared to the same periods of 2006. The adverse loss experience at Markel Re resulted from higher than expected average claim frequency and severity and arose primarily from two general liability programs within the Specialized Markel Alternative Risk Transfer (SMART) division. Both programs were non-renewed in the first quarter of 2007. The nine months ended September 30, 2006 included unfavorable loss reserve development of $14.6 million on the 2005 Hurricanes.

The Excess and Surplus Lines segment’s combined ratio for the quarter and nine months ended September 30, 2007 included $51.6 million and $119.5 million, respectively, of favorable development of prior years’ loss

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reserves compared to $56.1 million and $126.0 million, respectively, for the same periods in 2006. The redundancies on prior years’ loss reserves experienced within the Excess and Surplus Lines segment during both periods of 2007 were primarily on our professional liability programs at the Shand Professional/Products Liability unit and on our casualty programs at the Essex Excess and Surplus Lines unit. During both periods of 2006, the redundancies on prior years’ loss reserves experienced within the Excess and Surplus Lines segment were primarily on our professional liability programs at the Shand Professional/Products Liability unit. In both periods of 2007, the redundancies on prior years’ loss reserves at the Shand Professional/Products Liability unit decreased from the same periods of 2006 due to the softening of the insurance market, which has resulted in a deterioration in pricing at this unit. The favorable development on prior years’ loss reserves during both periods of 2007 within the casualty programs at the Essex Excess and Surplus Lines unit primarily resulted from better than expected case loss activity on the 2003 to 2006 accident years. These loss reserve redundancies experienced in the quarter and nine months ended September 30, 2007 were partially offset by adverse loss reserve development within the SMART division at the Markel Re unit.

The combined ratio for the Specialty Admitted segment was 90% and 92%, respectively, for the quarter and nine months ended September 30, 2007 compared to 89% and 92%, respectively, for the same periods in 2006. In both periods of 2007, a lower loss ratio was offset by a higher expense ratio as compared to the same periods of 2006.

The London Insurance Market segment’s combined ratio was 90% and 93%, respectively, for the quarter and nine months ended September 30, 2007 compared to 97% and 105%, respectively, for the same periods in 2006. The improved underwriting performance for the third quarter of 2007 was primarily due to $20.0 million of favorable development on prior years’ loss reserves compared to $5.1 million of adverse development on prior years’ loss reserves during the same period of 2006. The nine months ended September 30, 2007 included $32.6 million of favorable development on prior years’ loss reserves compared to $31.1 million of adverse development on prior years’ loss reserves during the same period of 2006. The nine months ended September 30, 2006 included $42.9 million of adverse loss reserve development on the 2005 Hurricanes. In both periods of 2007, the improved underwriting performance resulting from favorable development of prior years’ loss reserves was offset in part by a higher current accident year loss ratio due in part to softening insurance market conditions. The current accident year loss ratio was also lower in both periods of 2006 due to lower than anticipated frequency and severity of current year losses on several property classes of business. The redundancies on prior years’ loss reserves experienced within the London Insurance Market segment during both periods of 2007 were primarily on our professional liability programs within the Retail and Professional and Financial Risks divisions at Markel International. This favorable development on prior years’ loss reserves reflects improved risk selection and the favorable rates and terms associated with the London market in recent years.

In all periods presented, we have experienced significant redundancies in prior years’ loss reserves on the 2002 to 2005 accident years. During 2007, we experienced redundancies on the 2006 accident year as well. The positive trend in these prior years’ loss reserves was partially the result of the more favorable rates and terms associated with a hard insurance market that began in 2000. While the favorable rates and terms obtained during the hard insurance market created an expectation of improved underwriting results, the impact from this favorable environment could not be fully quantified at that time and our initial estimates did not fully reflect this positive trend. The product lines most significantly impacted by the hard insurance market were, generally, long-tailed coverages including the professional liability coverages written by the Shand Professional/Products Liability unit and Markel International. Long-tail business describes lines of business for which specific losses

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may not be known and reported for some period and losses take much longer to emerge. As actual losses experienced on these accident years have continued to be lower than anticipated, it has become more likely that the underwriting results will prove to be better than originally estimated. Over time, greater credibility has been given to this positive trend. In each period presented, we have updated the factors used in our actuarial methods to reflect this favorable trend, resulting in a reduction to prior years’ loss reserves.

While we believe it is possible that there will be additional redundancies on prior years’ loss reserves in 2008, we caution readers not to place undue reliance on this positive trend. Beginning in 2004, we saw a softening of the insurance market and experienced a slow down in the rate of increase in prices as a result of increased competition. Competition remained strong in 2005 and increased further in both 2006 and 2007, resulting in deterioration in pricing in each period. Similar to the impact of the hardening of the insurance market that began in 2000, the impact of the softening insurance market on our underwriting results cannot be fully quantified in advance. In both hard and soft insurance markets, our philosophy is to establish loss reserves that are more likely redundant than deficient; however, we do not expect that redundancies on prior years’ loss reserves will remain at the same levels in 2008 and beyond.

The Other segment produced an underwriting loss of $17.5 million and $15.8 million, respectively, for the quarter and nine months ended September 30, 2007 compared to an underwriting loss of $16.9 million and $22.9 million, respectively, for the same periods in 2006. The underwriting loss for both the quarter and nine months ended September 30, 2007 included $34.0 million of loss reserve development on asbestos and environmental exposures compared to $16.7 million in both periods of 2006. For both periods of 2007, the increase in loss reserves for asbestos and environmental exposures was offset in part by favorable development of loss reserves in other discontinued lines of business. The increase in asbestos and environmental reserves in all periods was a result of the completion of our annual review of these exposures during the third quarters of 2007 and 2006. During these reviews, we noted higher than expected settlements on existing claims during the past twelve months, which caused us to increase our estimate of ultimate loss reserves for asbestos and environmental exposures. The need to increase asbestos loss reserves in each of the past two years demonstrates that asbestos and environmental reserves are subject to significant uncertainty due to potential loss severity and frequency resulting from an uncertain and unfavorable legal climate. We have established asbestos and environmental reserves without regard to the potential passage of asbestos reform legislation. These reserves are not discounted to present value and are forecasted to pay out over the next 50 years. We seek to establish appropriate reserve levels for asbestos and environmental exposures; however, these reserves could be subject to increases in the future.

Premiums and Net Retentions

The following tables summarize gross premium volume, net written premiums and earned premiums by underwriting segment.

Gross Premium Volume

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Gross premium volume for the quarter and nine months ended September 30, 2007 decreased 5% and 6%, respectively, compared to the same periods in 2006. The decrease in both periods of 2007 was primarily the result of increased competition across many of our product lines and the decision to exit certain programs underwritten by Markel Re’s SMART division that were not meeting our underwriting profit targets.

We expect that competition in the property and casualty insurance industry will remain strong throughout the remainder of 2007 and into 2008. With the exception of rate increases on certain catastrophe-exposed business, rates are generally lower compared to the prior year. Lines of business where rates have declined include our casualty, professional liability and non-catastrophe-exposed property programs. When we believe the prevailing market rates will not support our underwriting profit targets, the business is not written. As a result, gross premium volume may vary. We continue to focus on superior customer service, new product development, geographic expansion and increased marketing efforts to address softening insurance market conditions.

Net Written Premiums

Net retention of gross premium volume was 86% for the third quarter of 2007 and 87% for the nine months ended September 30, 2007 compared to 86% for both periods of 2006. As part of our underwriting philosophy, we seek to offer products with limits that do not require significant amounts of reinsurance. We purchase reinsurance in order to reduce our retention on individual risks and enable us to write policies with sufficient limits to meet policyholder needs.

Earned Premiums

Earned premiums for the quarter and nine months ended September 30, 2007 decreased 5% and 2%, respectively, compared to the same periods in 2006. For both periods of 2007, the decrease was due to lower earned premiums in the Excess and Surplus Lines segment as a result of lower gross premium volume compared to the same periods a year ago.

Investing Results

Net investment income for the third quarter of 2007 was $80.9 million compared to $71.0 million for the third quarter of 2006. Net investment income for the nine months ended September 30, 2007 was $235.5 million compared to $203.4 million for the same period of 2006. The increase in both periods of 2007 was primarily due to a larger investment portfolio compared to the same periods of 2006.

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Net realized investment gains for the third quarter of 2007 were $3.0 million compared to net realized investment gains of $1.4 million for the third quarter of 2006. For the nine months ended September 30, 2007, net realized investment gains were $64.7 million compared to $39.9 million for the same period last year. Variability in the timing of realized and unrealized investment gains and losses is to be expected.

At September 30, 2007, we held securities with gross unrealized losses of $97.2 million, or 1% of invested assets. At September 30, 2007, all securities with gross unrealized losses were reviewed, and we believe that there were no indications of declines in estimated fair value that were other-than-temporary.

Other Expenses

The estimated annual effective tax rate was 31% for the nine months ended September 30, 2007 compared to 30% for the same period in 2006. The estimated annual effective tax rate differs from the statutory tax rate of 35% primarily as a result of tax-exempt investment income.

In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). We adopted the provisions of FIN 48 on January 1, 2007. As a result of adopting FIN 48, retained earnings increased $20.1 million; goodwill decreased $9.4 million, primarily related to our acquisition of Markel International; and common stock increased $2.8 million related to closed stock option plans and other capital transactions. In addition, the valuation allowance established upon the acquisition of Markel International and a corresponding deferred tax asset were both decreased by $37.5 million.

At the time we adopted FIN 48, we had unrecognized tax benefits of $45.8 million. If recognized, $6.8 million of these tax benefits would decrease the annual effective tax rate, $37.5 million would decrease goodwill and $1.5 million would decrease deferred tax assets in the year those benefits are realized. There were no significant changes in unrecognized tax benefits during the nine months ended September 30, 2007, and we do not currently anticipate any significant changes in unrecognized tax benefits during 2007.

Comprehensive Income

Comprehensive income was $111.5 million for the third quarter of 2007 compared to $237.0 million for the same period of 2006. For the nine months ended September 30, 2007, comprehensive income was $258.4 million compared to $313.9 million for the same period in 2006. Comprehensive income for the third quarter of 2007 included net income of $92.4 million and net unrealized gains on investments, net of taxes, of $16.2 million. Comprehensive income for the nine months ended September 30, 2007 included net income of $312.2 million, which was partially offset by net unrealized losses on investments, net of taxes, of $59.1 million.

Financial Condition

Invested assets were $7.7 billion at September 30, 2007 compared to $7.5 billion at December 31, 2006. Net unrealized holding gains on investments, net of taxes, were $403.4 million at September 30, 2007 compared to $462.5 million at December 31, 2006. Equity securities and investments in affiliates were $1.9 billion, or 25% of invested assets, at September 30, 2007 compared to $1.8 billion, or 24% of invested assets, at December 31, 2006.

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Net cash provided by operating activities was $383.3 million for the nine months ended September 30, 2007 compared to $362.5 million for the same period in 2006. The increase was primarily the result of higher operating cash flows at Markel International, due in part to lower claim payments related to the 2005 Hurricanes, for the nine months ended September 30, 2007 compared to the same period of 2006.

For the nine months ended September 30, 2007, net cash used by financing activities was $208.3 million compared to net cash provided by financing activities of $58.6 million for the same period of 2006. On January 2, 2007, we redeemed the remaining outstanding Junior Subordinated Deferrable Interest Debentures for $111.0 million. Additionally, during the third quarter of 2007, we repaid $73.0 million on our 7.20% unsecured senior notes, which matured August 15, 2007. Net cash provided by financing activities during the nine months ended September 30, 2006 resulted from a debt issuance during the third quarter, partially offset by cash used to repurchase shares of our common stock and retire a portion of both our senior long-term debt and our Junior Subordinated Deferrable Interest Debentures.

We have access to various capital sources, including dividends from our insurance subsidiaries, holding company invested assets, undrawn capacity under our revolving credit facility and access to the debt and equity capital markets. We believe we have sufficient liquidity to meet our capital needs.

Shareholders’ equity was $2.6 billion at September 30, 2007 compared to $2.3 billion at December 31, 2006. Book value per share increased to $257.31 at September 30, 2007 from $229.78 at December 31, 2006 primarily due to $258.4 million of comprehensive income.

Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the result of changes in equity prices, interest rates, foreign exchange rates and commodity prices. Our consolidated balance sheets include assets and liabilities with estimated fair values that are subject to market risk. Our primary market risks are equity price risk associated with investments in equity securities, interest rate risk associated with investments in fixed maturities and foreign exchange risk for our international operations. We have no material commodity risk.

Our market risks at September 30, 2007 have not materially changed from those identified at December 31, 2006.

As of the end of the period covered by this quarterly report, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15 (Disclosure Controls). This evaluation was conducted under the supervision and with the participation of our management, including the Chairman and Chief Executive Officer (CEO) and the Senior Vice President and Chief Financial Officer (CFO).

Our management, including the CEO and CFO, does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative

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to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based upon our controls evaluation, the CEO and CFO have concluded that our Disclosure Controls provide reasonable assurance that the information we are required to disclose in periodic reports is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding disclosure and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There were no changes in our internal control over financial reporting during the third quarter of 2007 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Safe Harbor and Cautionary Statement

This report contains statements concerning or incorporating our expectations, assumptions, plans, objectives, future financial or operating performance and other statements that are not historical facts. These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

There are risks and uncertainties that may cause actual results to differ materially from predicted results in forward-looking statements. Factors that may cause actual results to differ are often presented with the forward-looking statements themselves. Additional factors that could cause actual results to differ from those predicted are set forth under “Risk Factors” and “Safe Harbor and Cautionary Statement” in our 2006 Annual Report on Form 10-K or are included in the items listed below:

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Our premium volume and underwriting and investment results have been and will continue to be potentially materially affected by these factors. By making forward-looking statements, we do not intend to become obligated to publicly update or revise any such statements whether as a result of new information, future events or other changes. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as at their dates.

PART II. OTHER INFORMATION

See Exhibit Index for a list of exhibits filed as part of this report.

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, this 31^st day of October, 2007.

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Exhibit Index

Registrant’s report on Form 10-Q for the quarter ended June 30, 2007.

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